|Prospects Bright for Caspian Oil Pipeline |
Prospects Bright for Caspian Oil Pipeline
Partners in Baku-Ceyhan line accelerate negotiations. Source: Washington File, May 7, 1999, by Phillip Kurata USIA Staff Writer.
Washington D.C. -- The senior U.S. official in charge of Caspian Basin energy policy says accelerated efforts are underway to complete negotiations for a huge pipeline to carry crude oil from the Caspian to the Mediterranean Seas by July.
"We are on the track. We are on the right track. I would say that there is a huge probability that Baku-Ceyhan (pipeline) will become reality," Richard Morningstar said at the annual Conference on U.S.-Turkish Relations in Washington May 6.
Morningstar is the Special Adviser to the President and Secretary of State on the Caspian Basin energy diplomacy. The governments of Turkey and Azerbaijan, the Azerbaijan state oil company, and the 11 foreign oil companies involved in the Azerbaijan International Operating Company signed an agreement, the Istanbul Protocol, in April, Morningstar said.
The signatories pledged their "best efforts" to complete the necessary agreements in three months to form an international consortium to build a 1,600 kilometer pipeline from Baku, the Azerbaijan capital on the western shore of the Caspian Sea, through Georgia, to Ceyhan, a deep water port on Turkey's Mediterranean coast.
Morningstar said negotiators are working on an intergovernmental agreement, a host government agreement, and a Turkish guarantee as to the maximum cost of the pipeline.
Once the legal framework for the pipeline is established, Morningstar says the oil companies would establish a Main Export Pipeline Company (MEPCO), which would conduct more detailed feasibility studies and assembly a final financing package.
Morningstar says MEPCO must include partners from both sides of the Caspian Sea. "It is going to be important that eastern Caspian oil be aggregated to make the pipeline viable and it is important for eastern Caspian producers that they have a western outlet," Morningstar said. Kazakhstan and Turkmenistan have substantial fossil fuel reserves on the eastern side of the Caspian.
The Baku-Ceyhan pipeline would carry 330 million barrels of crude oil a year out of central Asia to western markets, avoiding Russia on the north and Iran and Iraq on the south. The pipeline is a strategic element of the U.S. policy to bring prosperity and democracy to the New Independent States of Central Asia and enhance western energy security.
Until recently foreign oil companies were reluctant to invest because of concerns that the pipeline would not be economically feasible. The cost of building the pipeline is estimated around $3,000 million, and it would deliver a barrel of west Kazakh crude to Ceyhan for about $10, according to France's Total oil company. Pumping a barrel of west Kazakh crude to a port on the Black Sea would cost a little more than $4, Total says.
Support for the Baku-Ceyhan pipeline has grown with the realization that shipping Caspian oil via tanker through the Bosporus Strait in Istanbul is not a long-term option.
"The companies have recognized clearly that the Bosporus does not provide a long-term solution to Caspian oil exports. Turkey's concerns over environmental and safety ramifications from a major increase of oil tanker traffic in the Bosporus are legitimate," Morningstar said.
The Bosporus, a narrow 30-kilometer long channel connecting the Mediterranean Sea with the Black Sea, is the world's most crowded waterway. Environmentalists say it is a disaster waiting to happen because of the large number of tankers passing through it.
At U.S. government urging, the Turkish government has taken steps to assure foreign oil companies that the Baku-Ceyhan pipeline would be commercially viable, Morningstar said.
Another pipeline, this one to carry natural gas from Turkmenistan on the western shore of the Caspian to Turkey through Azerbaijan and Georgia, is under advanced negotiations.
Edward Smith, the chief executive officer of PSG, says the ingredients are present to make the trans-Caspian natural gas pipeline a success: a market in Turkey, a source of supply in Turkmenistan and the technological prowess to build an underwater conduit at a depth of 100 to 200 meters.
Holding up the start of construction are a maze of political and legal problems with the governments involved in the gas line, Smith said.
Issues that must be addressed before financiers will put up money include taxation, foreign exchange rules, and dispute resolution mechanisms, says Robert Winter, a lawyer involved in contract negotiations for Caspian energy projects.
A guarantee from the Turkish Finance Ministry that foreign investors will be able to repatriate their profits requires change in Turkey's laws, possibly its constitution, Winter said.
Smith says he hopes the gas line would go into operation in 2002 or 2002.